The world of e-commerce isn’t slowing down, but many e-commerce aggregators are already struggling. Declining consumer confidence, inflated brand value and frozen investment capital are creating a real storm. Unless aggregators change the way they operate, their future is bleak at best and non-existent at worst.
At Pattern, we predicted the demise of the aggregator business model last year, but the moment of truth came even sooner than we thought. That said, there is still time for these companies to correct their trajectory. If aggregators act quickly, they can position themselves well for their next phase of growth. But first, how did we get here?
The broken model
In theory, the brand deployment business model seems like it could work. An aggregator buys consumer product companies and uses its existing infrastructure to scale them and make a profit. Earnings before interest, taxes, depreciation, and amortization (EBITDA) for many of these brands are already two or three times their original purchase price. Buy enough and you’re looking at EBITDA arbitrage – a 20 or 30 times increase in your own valuation. So far, so good.
However, this is where most of these aggregators stop. While they’re great at acquiring brands, they’re terrible at investing in R&D, innovation, and operations — all the things that matter to growing one brand, let alone a dozen.
Additionally, many aggregators were working on a hyper-accelerated schedule. They had a finite (and dwindling) number of brands to buy at short notice if they wanted to bundle them up and turn them into a bundle. So they kept buying brands without going through the usual due diligence, which inevitably led to buying brands with poor products, inflated sales, and fake reviews.